Spain in crisis – Spanish workers take to the streets to demonstrate against the government's austerity measures on September 15, 2012 in Madrid.

Hide Caption

7 of 17

Photos:Photos: Spain in crisis

Regional splits – Supporters of independence for Catalonia demonstrate on September 11, 2012 in Barcelona to mark the Spanish region's official day, amid protests over Spain's financial crisis.

Hide Caption

8 of 17

Photos:Photos: Spain in crisis

Miners protest – The streets of Leon in northern Spain light up as thousands of coal miners march with their helmet lights on. The protest on June 12, 2012 was part of a nationwide miners' strike against subsidy reductions.

Hide Caption

9 of 17

Photos:Photos: Spain in crisis

Bankia most indebted bank – A vampire puppet holding money is held by protesters outside Bankia's building Kio Tower in Plaza Castilla, on June 2, 2012 in Madrid

Hide Caption

10 of 17

Photos:Photos: Spain in crisis

Demonstrations against austerity – Spanish miners burn tires during an anti-austerity demonstration in Vega del Rey, near Oviedo, in northern Spain on June 4, 2012.

Hide Caption

11 of 17

Photos:Photos: Spain in crisis

'Indignant' challenge – A protester hits a pot while walking past the Bank of Spain on May 15, 2012 in Madrid, Spain. Spain's 'Indignants' prepared events across Spain to mark the anniversary of their movement.

Hide Caption

12 of 17

Photos:Photos: Spain in crisis

Crowds gather – Protesters with Spain's Indignant movement attend a rally at Puerta del Sol on May 15, 2012 in Madrid, Spain. The movement was formed to protest against the economic crisis and high unemployment.

Hide Caption

13 of 17

Photos:Photos: Spain in crisis

Health workers protest – Health workers in Seville protest against government austerity measures on June 12, 2012. The campaigners display banners saying 'Don't play with health' and 'More gowns and fewer ties.'

Hide Caption

14 of 17

Photos:Photos: Spain in crisis

Spain's banks stumble – People demonstrate against Spain's banking sector in front of Bankia, on June 02, 2012. Bankia asked for €19 billion in aid.

Hide Caption

15 of 17

Photos:Photos: Spain in crisis

Bankia's bailout – Commuters are reflected on the headquarters of Bankia SA on May 29, 2012 in Madrid, Spain. Spanish borrowing costs have increased after the government announced a rescue plan for Bankia involving more public debt.

Hide Caption

16 of 17

Photos:Photos: Spain in crisis

Spain gets aid – Activists stage a performance depicting Prime Minister Mariano Rajoy and a banker outside the Congress of Deputies in Madrid on June 12, 2012. The demonstration came days after Spain secured a eurozone banking bailout of €100 billion euros ($125 billion).

Hide Caption

17 of 17

Story highlights

Spain, a eurozone behemoth, is in the crosshairs of Europe's financial crisis

The country faces soaring borrowing costs, a banking system in disarray and high unemployment rates

If such a major economy were to fail, the repercussions could cause unprecedented havoc across the globe

But the situation in Spain is developing like a "perfect storm," with money being pulled out of the country

Spain, a eurozone behemoth, is in the crosshairs of Europe's financial crisis. The country is suffering from soaring borrowing costs, a banking system leaking cash and unemployment rates at devastating levels.

Greece might be risking expulsion from the eurozone but Spain's situation is a focus of concern. If such a major economy were to fail, the repercussions could cause unprecedented havoc across Europe -- and the globe.

Just how bad is the pain in Spain?

On Thursday, Spain will reveal its 2013 budget, which is expected to introduce harsh new austerity measures. Reports have suggested they could match the potential requirements of a full sovereign bailout.

According to Michala Marcussen, Societe Generale economist, "substantial efforts" will be required to meet a budget deficit target of 4.5%.

JUST WATCHED

Spain's olive oil crisis

MUST WATCH

Spain's olive oil crisis02:45

The budget is followed by Friday's release of the country's banking audit, which is expected to reveal details of the sector's financial needs. Consensus sits at €60 billion and "too low a number will raise concerns that there are more hidden losses to come -- all the more given the very frail economic backdrop," Marcussen wrote in an analysis note.

The audit follows an agreement by eurozone finance ministers in June to give aid to Spain, tagging up to €100 billion to shore up its banking sector. At the time, Spain's prime minister, Mariano Rajoy, said the deal meant "European credibility won, the future of the euro won [and] Europe won."

The country has been facing credit issues after its financial problems were thrown into sharp relief by the bailout of Bankia, the country's fourth-largest bank.

Bankia was forced to call for €19 billion ($23.7 billion) in assistance in May, panicking markets. It sent Spain's cost of borrowing (for the sovereign 10-year bond) toward 7% -- a level which is regarded as unsustainable and has precipitated bailouts of other euro countries.

But Spain -- in its second recession since 2009 -- has been dubbed "too big to bail, too big to fail."

The Spanish economy is the eurozone's fourth-largest -- after Germany, France and Italy -- making up around 11% of the bloc's GDP.

To put that in perspective, Greece, Portugal and Ireland -- the three eurozone countries which have already been bailed out -- combined make up less than 6% of the bloc's economy.

Spain's banking sector is facing up to years of bad investments, largely in real estate, which was buoyed by cheap credit and the country's sunny climate.

Its housing boom-times of 2002 to 2008 were fed, in part, by retired north Europeans buying up second houses in places such as Valencia and Murcia, according to political scientist Julio Embid, of think-tank Fundación Alternativas.

Real estate prices have now fallen some 30% to 50% from their highs, leaving Spain's banks, or cajas with housing stock on their books whose current value is much lower than the original.

Meanwhile hundreds of thousands of houses built during the boom remain unsold, and people wanting to buy may find it difficult to get credit.

JUST WATCHED

Spanish mayor likened to Robin Hood

MUST WATCH

Spanish mayor likened to Robin Hood 02:51

Embid also points to the cajas' politically-driven executive appointments as a contributing factor to the crisis. "Many senior bankers were low-profile regional politicians or majors, without any financial experience or bank background," he said.

JUST WATCHED

Selling sperm, eggs to survive

MUST WATCH

The government set up the FROB (Fund for Orderly Bank Restructuring) in 2009, to help reorganize its banking sector, and has received international recognition for its efforts to date.

According to April's International Monetary Fund report, the country has reduced the number of financial institutions from 45 to 11. The report noted: "The authorities are, rightly, focusing on strengthening the banking sector."

It said the authorities were showing "an appropriate sense of urgency" but also warned that "unless the weak institutions are quickly and adequately cleaned up, the sound banks will suffer unnecessarily by a continued loss of market confidence in the banking sector."

This leaves Spain in a precarious financial state, driving investors away, pushing up its borrowing costs and making it more likely to need a bailout.

It's a reminder of how governments are inextricably tied to their country's banking systems, essentially the lifeblood of their economy.

In Ireland, the banking sector's similar gorge on property forced the country to take a €67.5 billion bailout in 2010.

The mood of the markets may, ultimately, dictate Spain's ability to pull itself from its financial hole. Investors already twitchy about the prospect of a "Grexit" -- a Greek exit from the euro -- will react badly to further bad news out of Spain.

JUST WATCHED

Tough sell for Spain's real estate

MUST WATCH

Where does Madrid stand when it comes to making cuts to public services?

Spain's emergence as the crisis epicenter has again fed debate over the value of austerity over stimulus.

Greece, the first euro country to take a bailout, has been swallowing austerity medicine since 2010. But its economy has slid further into recession, and initial hopes it could detach itself from external life-lines within two years now look wildly optimistic.

Spain has also been implementing austerity measures to try and combat its crisis. Rajoy, who won a landslide victory over the Socialist Party in November 2011, focused on cost cutting and labor reforms. But, as with other fragile countries within the euro bloc, Spain's economy remains weak and its unemployment levels continue to rise.

Some European leaders are now voicing concerns against austerity measures and in the U.S., the Federal Reserve has moved towards more stimulus, with further quantitative easing.